Bullish on the “Chinese Google”

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

This bullish sentiment stands in sharp contrast to last Monday, when a dive in the Shanghai composite index pushed China (briefly) into bear market territory, with overall losses hitting 20% compared with its recent peak. That said, with Shanghai rallying late last week and overnight, this is a terrific time to play a bounce in Chinese stocks. And the best way to do that is through this week’s Global Bull Market Alert pick — Baidu, Inc. (BIDU) — the “Google of China.”

Since going public in August 2005, Baidu quickly has become the leading Internet search engine in China. Boasting a Google-style market share of 75.7% in the second quarter of 2009, Baidu is the largest beneficiary of China’s Internet user base of 338 million. ComScore, a U.S. marketing-search company, recently named Baidu as the world’s second-biggest search engine, with a 6.9% worldwide market share. That makes Baidu bigger than U.S. pioneer Yahoo! (YHOO).

Baidu’s dominant position in the Chinese market also is reflected in its strong fundamentals. The company recently reported second quarter earnings of $1.61 per share, above consensus estimates of $1.44. Its annual EPS growth rate comes in at an eye-popping 110%.

And with a market cap of just under $12 billion and average trading volume of close to 1.9 million shares per day, Baidu is not a typical low-cap Chinese speculative play. The “Google of China” is actually one of the most widely held institutional stocks among top-performing mutual funds in the U.S.

Finally, Baidu’s recent pullback to its 10-week moving average offers a particularly good entry point for the stock. With Deutsche Bank placing a price target of $408 on Baidu, I believe that there is a solid 18-20% upside in the stock in the coming months.

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So, buy Baidu, Inc.(BIDU) at market today and place your stop at $295. If you want to play the options, I recommend the December $360 calls.

Full disclosure: this is a position that I already hold for some of my own clients at my investment firm Global Guru Capital. (Please note that Global Guru Capital is not related to Eagle Publishing or any of its investment publications or trading services.)

Portfolio Update

The iShares MSCI BRIC Index ETF (BKF) ended the week slightly higher, despite the sharp sell-off in global markets last Monday. BKF is a BUY.

The WisdomTree Dreyfus Emerging Currency ETF (CEW) bounced back slightly this past week. This is a defensive position that lags when markets are bullish and shines when markets pull back. It remains a HOLD.

iShares MSCI Chile Investable Market Index (ECH) climbed back above the $46 level week. It remains a HOLD.

The iShares MSCI Israel Cap Invest Mkt Index (EIS) resumed its upward trend after selling off earlier in the week. EIS remains a BUY.

The iShares MSCI Hong Kong Index (EWH) climbed back over the $15.00 level, ending the week up. With Asian markets selling off sharply but then recovering as they lead the global recovery, Hong Kong remains a BUY.

SPDR S&P Emerging Markets Small Cap ETF (EWX) ended the week flat in its first week in the portfolio. That said, I expect it to strengthen on both improving fundamentals and sentiment in global markets. EWX is a BUY.

The iPath DJ AIG Copper TR Sub-Idx ETN (JJC) climbed back over the $40 level on intra-day trading on Friday. With the economic news improving across the board, this canary in the (economic) coal mine remains a BUY.

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PowerShares Financial Preferred (PGF) sold off sharply on Thursday after the downgrade of the debt of some European banks by ratings agency Fitch. I believe that was an overreaction. This is a terrific time to add to your positions. PGF is a BUY.

Claymore/AlphaShares China Real Estate ETF (TAO) sold off below the $17 level last Monday. But with the position technically oversold, and sentiment in China on the rebound, I am moving TAO back to a BUY.

P.S. The constantly changing market environment continues to present investors with some of the most challenging times in recent history. Mark your calendar for Thursday, September 10, 2009, at 2 p.m. EDT for my first-ever LIVE teleconference when I will discuss “How to Profit in Global Markets During the 4th Quarter.” This is your chance to hear my predictions and learn how to profit in the next three months. This special, FREE event is for subscribers only. I hope you will join me and your fellow subscribers on this call. Expect to receive a phone call from me at roughly 2 p.m. on Thursday, Sept. 10, and I encourage you to pick up the phone and join the call. Please click here to verify or update your phone number to ensure I can reach you.

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